Development Stage: Series A. This stage focuses on scaling up the product and operations after market validation.
Use of Funds: Enhancing management capabilities, governance, and expanding market reach on a large scale.
To Showcase to Investors:
- Solid financial statements
- A clear path to profitability and free cash flow to equity holders
- Comprehensive and detailed customer data
Highlights:
- Business Model: Educational toys for children of various ages.
- Sales Model: Direct-to-consumer (D2C) through the website, outsourced fulfillment services, and integrated technology solutions.
- Value Proposition:
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- Safe, high-quality, and engaging materials for children: Meets US ASTM standards, passing 10-15 safety tests for toys across different age groups.
- Personalized with the child’s name.
- Fast production time, with products ready in 1-3 days. This is significantly faster than the US, where personalized products, especially larger ones, can take 2-3 months.
- Door-to-door shipping directly to the US.
- Target Market: Focuses on educational toys for children aged 0-5, a critical period for brain development (85% of brain development occurs during these years). Additionally, the company designs toys different age groups.
- Market Performance: Achieved top 10 sales on the Frys platform in the US, Australia, and Canada. Target Market: United States and Europe.
- Core Competencies: Focused on R&D and rapid product development cycles.
- Founder: Highly motivated, with a deep understanding of the supply chain, industry insights, and a strong desire to build a global Vietnamese brand.
Something that most investors don’t understand as well as founders are industry insights. For example, when founders visit China, they see that the workforce in factories is aging, with many workers in their 40s and 50s. Younger workers have moved to other industries. Moreover, this labor force faces challenges when doing business internationally, especially language barriers.
Profit & Loss:
- 2020-2021: Revenue of USD1mn/year.
- 2023 revenue: VND95bn, representing a 10% growth.
- 2024E revenue: VND220bn, with an EBITDA margin of 18%.
- 1H24 revenue: VND79bn. Notably, sales in the last month of 2024, during the US Christmas season, were very strong.
- Revenue breakdown: 40% from the company’s website and 60% from e-commerce platforms.
- Management costs: VND1.5bn (3-4% of revenue). I assume this includes fixed and variable costs for packaging and shipping products to customers.
- COGS: 16% of revenue.
- Shipping costs: 20-22% of revenue, included in COGS.
- Marketing costs: 30-33% of revenue, including advertising, promotions, discounts, and platform fees.
Vertical breakdown of cost structure:
- COGS: 16% + 22%
- OPEX: 4% + 33%
- If we subtract these, EBITDA is 25%.
- OPEX: Operating expenses.
- COGS: Cost of Goods Sold.
Questions:
- Missing 15% of EBITDA: If the 2023 EBITDA is only 10%, where is the remaining 15%? Could it be accounted for in a “521 account” (which I assume is a specific accounting term in your local accounting standards)?
- Personnel and Management Costs: Are personnel and management costs included in the 4% OPEX figure?
- EBITDA Increase: Why did the EBITDA increase from 10% to 18% at the end of the 2024 fiscal year? Is it primarily due to rapid revenue growth while other costs remained relatively stable?
- Improving Gross Margin: What metrics or benchmarks show that future developments will increase OPEX but improve gross margin at the same time.
- OPEX and Market Share: Typically, gaining market share requires increased OPEX. Can you explain why this is not always the case?
- Improving Gross Margin in Future Rounds: How can we improve the gross margin in future funding rounds (Series B and Series C) when scaling production?
Deal Structure:
- Funding Request: USD1mn for a 10% equity stake. Post-money valuation: VND254bn.
- Projected Performance: In 3 years, the company forecasts revenue of USD25mn with an EBIT margin of 13%.
Assessment:
- Based on 2023 performance: The valuation seems expensive.
- Based on 2024E performance: The valuation appears cheap.
- For a 6-month deal: The valuation is attractive considering a reference P/EBITDA of 6.5-8 times.
- Depreciation: If there’s no manufacturing plant yet, depreciation is mainly for tools and equipment.
- EBIT vs EBITDA: Assuming an EBIT of 13%, the EBITDA is estimated at 15% for easier calculations.
Question:
Why does the EBITDA increase to 18% in 2024 and then decrease to 15% after 3 years of growth (as provided by the founders)?
Overall:
This is a rare opportunity, a potentially lucrative deal that the sharks should seize immediately. The company has significant growth potential (considering TAM, SAM, SOM) and a mature team below the founders.
Balance Sheet Information:
- Owner’s Equity: VND20bn
- Total Assets: VND36bn
- Inventory: VND6bn
- Liability: Loans of VND5bn
- DSO: 85% of revenue is outstanding for 45 days.
Questions:
- Does the deposit include the payment gateway deposit fee, or what is this deposit for?
- DSO, DIO, DPO: I guess your capital turnover is 60 days.
- DIO = 45 days -> Average inventory = 4.4 billion in low-season months / compared to the benchmark of 6 billion (above). This is close enough to be reasonable.
- With the 2024 business plan, the total cost is 180.4, the estimated working capital for 1 cycle is 30.06 billion.
- Free Cash Flow = 39.6 Profit – negligible CAPEX + 4.4 billion Depreciation – 30.06 billion > 0; the model has a free cash flow (FCFE) of approximately 13.4 billion.
- ROE (Return on Equity) in 2024 = 48%, instead of investing elsewhere, shareholders can invest in this rapidly growing business to get an ROE of up to 48% with an attractive growth rate, even accepting to issue additional shares for dividends instead of cash issuance because the company is in a favorable growth phase.
- Marketing and Communication Challenges: How to explain to parents the educational value of toys:
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- Solved through Viral content + Livestreaming.
- Backed by: An R&D team of 40 people, early childhood education teachers, product design, prototype production to mass production.
Overall Assessment of the Deal:
- The founders are very passionate, bold, and ambitious. Having gone through Series A, they have demonstrated maturity in management, emotional intelligence, stable energy, humility, and a willingness to collaborate and accept external resources.
- They have a strong grasp of the industry’s core, supply chain, and macro trends. With the US imposing tariffs on Chinese goods and many US companies avoiding products from Mainland China, coupled with China’s rising GDP per capita and the shift of non-core manufacturing industries to Vietnam, a significant opportunity exists for them. Equitix has a case study of a company that successfully competed in the US filtration market due to this trend.
- The growth rate is impressive, increasing from 23 billion in 2021-2022 to 95 billion in 2023. If this was achieved with self-funding, it is truly remarkable. The most crucial aspect is the underlying rationale behind this rapid growth.
- The website generates 40% of revenue, which is challenging in Vietnam but less so for D2C in Europe, the US, and Canada where international payment and fulfillment services are more mature.
- The business model is projected to have a positive free cash flow. Strategic investors are needed, as a $1 million investment is insufficient for building a large-scale factory.
- I propose raising a Series A round of USD7.017mn for a 36% stake, with a post-money valuation of USD19.489mn. Build a factory to reduce costs and improve quality, then raise another round at a valuation of USD800mn to USD1bn.
- For the Series B round, with USD40mn in revenue and a 15% EBITDA, raise an additional USD20.57mn for a 30% dilution, with a post-money valuation of USD68.57mn.
- Three strategic priorities are: factory operations, international marketing, and corporate governance. Equitix can assist by connecting the founders with strategic investors who have the necessary expertise to operate manufacturing facilities, something the company may not be fully equipped to handle at this stage. We can allocate USD1-2 mn for this deal.
- We can explore connections with investors who can provide these resources.
- Financial models can be adjusted to optimize capital allocation.
Congratulations to the founders and the shark tank team!
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